Intermediate Accounting 1: Chapter 6

Stockholders' equity, also referred to as shareholders' equity and owners' equity, is generally separated into four major categories:

contributed capital, retained earnings, accumulated other comprehensive income, and noncontrolling interest.

Accumulated other comprehensive income (or loss)

cumulative amount of other comprehensive income (or loss) over the life of the entity.

Cash and cash equivalents (a current asset)

cash (coins, currency, and money orders) and cash equivalents (short-term, highly liquid investments acquired with three months or less to maturity). Cash equivalents include: Commercial paper (i.e., short-term loans receivable from high-quality corporations sold by commercial banks) Money market funds U.S. Treasury bills

Statement of cash flows uses

comparative balance sheet changes and non-cash expenses as well as net income.

Retained earnings

cumulative earnings (losses) of the company that have not been distributed as dividends to shareholders

Three common cash flow measures based on balance sheet information are

liquidity, solvency, and financial flexibility.

The statement of financial position (balance sheet)

lists an entity's assets, liabilities, and equity as of a specific point in time. It consists of permanent accounts with cumulative balances that the company carries forward period to period over the life of the firm.

account format

lists assets on the left side and liabilities and stockholders' equity on the right side of the statement.

report format

lists liabilities and stockholders' equity directly below assets on the same page.

Financial statement articulation

the relationships among financial statements and financial statement elements, is a critical concept in understanding financial statements.

Statement of Cash Flows Classification (3)

(it is a reconciliation of the cash account) operating investing financing

The statement of cash flows enables financial statements users to:

Assess the entity's ability to meet its obligations and pay dividends. Determine whether the entity will require external financing. Identify the differences between net income and the associated cash receipts and payments.

Equity on Statement of Financial Condition/ Balance Sheet

Contributed Capital (Common stock and Paid in Capital) Retained Earnings Accumulated Other Comprehensive Income Non-controlling Interest - long explanation

Operating section of cash flows

Cash receipts from customers Cash receipts from interest and dividends Cash payments for the purchase of goods for resale or for use in production Cash payments to suppliers and employees Cash payments for taxes Cash payments for interest

Financing section of cash flows

Cash received from sale of stock (all types) Cash received from borrowing Cash used in treasury stock purchases Cash payments of Debt Cash payment for Dividends

Liabilities on Statement of Financial Condition/ Balance Sheet

Current - Anything paid in the next 12 months (accounts payable, short-term notes, CMLTD, accruals, unearned) Non-current Liabilities - Anything to be paid in more than the next 12 months (capital leases, bonds, notes payable - due longer than 12 months)

Assets on Statement of Financial Condition/ Balance Sheet

Current Assets (in order) Cash and Cash Equivalents Short term investments Accounts Receivable Inventory Prepaids Long term investments Intangibles PP & E equipment capital leases

Changes in balances in current assets: (Indirect)

Current assets Increase, cash decreases current assets Decrease, cash increases

Calculation Methods for Cash Flow: (Indirect)

Indirect / reconciliation format (this class) - only operating section is calculated differently than Direct. Direct/ income statement format (Intermediate III) - preferred by FASB

Annual Report:

Letter to shareholders Financial Summary Management, discussion and analysis - liquidity, capital, results of operations, off balance sheet items, contractual obligations

Limitations of the balance sheet:

Many of the accounts on the balance sheet are reported at historical cost, as opposed to market values or liquidation values. A number of assets and liabilities are not recorded on the balance sheet. Many of the accounts reported on the balance sheet are based on estimates as opposed to determinable amounts.

Statement of Comprehensive Income (Income Statement and OCI-Statement) gives

Net income and OCI

Financial Statement Notes:

Provides accounting policies Subsequent events Related party transactions

Investing section of cash flows

Sale of Investments Sale of PP&E Collection of notes receivable Cash used to finance a note receivable Cash used to purchase PP&E Cash Used to purchase investments

Net Income and OCI go to statement of:

Stockholder Equity which includes ending retained earnings and accumulated OCI Statement of Financial Position (Balance Sheet) uses ending retained earnings and accumulated OCI in the equity section

The balance sheet helps to :

Summarizes the economic resources and obligations that impact the entity's ability to generate future cash flows. Is useful in assessing an entity's rate of return on its investments when examined in conjunction with the income statement. Aids in assessing the risk associated with an entity by providing inputs for cash flow measures.

Par value

The face or stated value on the share certificate is its par value, which is an arbitrary value that the organizers of the corporation place on the stock.

disclosure of a related-party transaction must include the following:

The nature of the relationship A description of the transaction The amount of the transaction Any amounts due from or to related parties

Accounts receivable (current asset)

are amounts owed to the entity resulting from the sale of goods or services to customers on credit

Prepaid expenses (current asset)

are assets that arise when expenses are paid before they are incurred.

Short-term notes payable

are formal, written promises to pay cash at a fixed maturity date in the future. The maturity date is within the next year or operating cycle, if longer.

Unearned revenues / deferred revenues

are liabilities resulting from advance collections of cash from a customer for goods or services to be provided in the future under existing sales or service contracts. The firm removes the liability from the balance sheet when it provides the goods or services to the customer.

Long-term investments

are noncurrent assets that are not used directly in the operations of the business. Examples are investments in debt and equity securities and investments in land and other property that are not used in operations.

Noncurrent liabilities

are obligations an entity does not expect to satisfy within one year or operating cycle, whichever is longer. They are not liquidated through the use of current assets or the creation of other current liabilities. Examples include long-term notes payable and the long-term portion of capital lease obligations, bonds payable, and pension obligations.

Accounts payable (current liabilities)

are obligations due to suppliers of goods or services incurred in the normal course of business operations.

Noncurrent liabilities

are obligations that are due after one year or one operating cycle, whichever is longer.

Current liabilities

are obligations that the firm expects to liquidate through the use of current assets or the creation of other current liabilities. Current liabilities will typically be paid within one year or operating cycle, whichever is longer.

Noncurrent assets

are resources that the firm expects to convert to cash, use, or consume in a period greater than one year or one operating cycle, whichever is longer

Current assets

are resources that the firm expects to convert to cash, use, or consume within one year or one operating cycle, whichever is longer.

Related-party transactions

are transactions that an entity engages in with owners, firm management, affiliated entities, or any other entity that can exert significant influence on the company.

indirect method for cash flows

begins with net income from the income statement and then reconciles the net income to net cash generated from operating activities. Adjustments for noncash items Changes in operating assets and liabilities

Non Cash financing Activities

borrowing for a specific purpose of purchasing equipment through debt or equity swap. Not included in the cash flow statement

Changes in balances in current liabilities: (Indirect)

current liabilities Increase, cash increases. current liabilites Decrease, cash decreases.

Non Cash Expenses add backs: (Indirect)

depreciation, amortization, depletion, stock option expense, loss on sale

Statement of Cash Flows provides

ending cash balance

audit

examination of the financial statements (including the footnote disclosures) and the internal controls over the systems that generate the financial statements and notes

noncontrolling interest

exists when one company controls another company (e.g., a subsidiary) but owns less than 100 percent of its voting shares. The controlling company adds all of the subsidiary's assets and liabilities to its own balance sheet.

direct method for cash flows

for reporting cash flows from operating activities, companies report actual cash inflows and outflows in the operating section of the statement of cash flows.

Non Cash transactions subtracted: (Indirect)

gain on sale, unrealized gain from trading securities.

Financial flexibility

indicates an entity's ability to respond to unexpected needs and opportunities by taking actions that alter the amounts and timing of cash flows.

Short-term investments (current asset)

investments in debt or equity securities of other corporations or governmental entities that the entity has the ability and intent to sell within the next year or operating cycle, whichever is longer.

Solvency

is a measure of a firm's long-term ability to pay its obligations as they mature.

Liquidity

is a measure of an asset's nearness to cash—that is, how quickly the firm can convert assets into cash and pay liabilities, with minimal risk of loss.

operating cycle

period of time from the acquisition of goods to the point at which the entity receives cash from the sale of the goods

summary of significant accounting

policies note provides the entity's portfolio of GAAP methods used in preparing its financial statements.

Contributed capital (also called paid-in capital)

primarily represents the amounts invested by shareholders. It includes the stock sold by the entity at face or par value and amounts received above par value, known as additional paid-in capital or paid-capital in excess of par.

Accrued liabilities

represent expenses incurred by an entity that remain unpaid at the end of the accounting period. Includes items such as utilities payable, wages and salaries payable, interest payable, and taxes payable. These accounts will be paid within the next year or operating cycle, if longer.

Current maturities of long-term debt

represent the portion of any long-term debt that is payable within the next year or operating cycle, if longer. This amount must be paid from current assets or result in the creation of other current liabilities in order to be classified as current. If the maturity of the debt is extended or if the debt is replaced by equity or other long-term debt, the debt is classified as long term.

MD&A : 5 topics that must be discussed

required part of the annual report that provides the information necessary to understand the entity's financial condition, changes in financial condition, and results of operations. The SEC specifies five topics that must be discussed: Liquidity Capital resources Results of operations Off-balance sheet arrangements Disclosure of contractual obligations

subsequent event

significant event that occurs after the date of the fiscal year-end but before the financial statements are issued or available to be issued. EX: sale of a business, the issuance of debt or equity securities, and the settlement of litigation.

statement of cash flows

summarizes a firm's cash inflows and outflows over a period of time.